The draft law was filed with Congress on Friday and is due to be approved on September 2 without recourse to a referendum, allowing it to be in place before general elections called for November 20 in which Prime Minister José Luis Rodríguez will not be standing, and which are expected to be won by the PP.

The government's latest effort to ward off attacks on its sovereign debt also affords a de[g]ree of flexibility in cases of "natural disasters, economic recession and situations of exceptional emergency out [of] the control of the government that considerably prejudice the economic or social sustainability of the state."

At a news conference after the regular Friday Cabinet meeting, government spokesman José Blanco "categorically" denied that reform had been carried out under heavy pressure from the European Central Bank. "The ECB never brought up the reform of the Constitution," he said. "You can't respond to a demand that never existed."

Despite the denials, there is widespread conviction (Update [2011-8-30 10:50:13 by Migeru]: and some evidence) that Zapatero has been subject to blackmail of some sort to submit to the demands of Merkel and Sarkozy. The impression that something is afoul here is based in part on the fact that as late as August 18, the conventional wisdom in Spain was that it was difficult to carry out the Constitutional reform that Sarkozy and Merkel demanded by mid-2012, and that the government's position was officially that the existing Law on Budget Stability (introduced by Aznar's PP government in 2001) was sufficient. (See the difficulty of inserting a zero deficit clause in the constitution, in Spanish)

The debt brake that, since 2009, is enshrined in the German Constitution is the main evidence of Angela Merkel's obsession to keep public accounts under control. A demand that now, with the support of Nicolas Sarkozy, she wants to cast in stone in the whole of the Eurozone by next summer.

Gleichschaltung, anyone?

To incorporate into the constitution of each country this kind of commitment will be hard, even with the support of all Governments, a condition that is now not fulfilled. In Spain, for instance, the Government holds that the Budget Stability Act is sufficient. The attempt to reinforce it by a spending rule applicable to all Administrations ended up with a mixed result: the regions, the administrative level that the markets most doubted, accepted a rule, but with their own criteria.

If the Spanish government decided to take the Franco-German demand on board, the road to a fast-track reform appears almost impossible: with the opposition of just 1/10 of deputies, the parliament would have to be dissolved and a referendum called.

Only two days after this was published, ZP announced his intention to introduce a constitutional spending ceiling during an extraordinary plenary session of the Parliament convened to discuss the recent financial turbulence. The reform will be carried out with two further extraordinary sessions this coming Tuesday and Friday, as the Parliament would normally be adjourned at this time.

I can think of one reason to attempt this now, though, and that is that after the November 20 elections it is likely that the PSOE will lose enough support so that the minor parties could assemble a blocking minority of 1/10 of the deputies, which is not the case now (after the 2008 elections, PP and PSOE together hold over 90% of all seats and so right now a backbench revolt among PSOE deputies is needed for a referendum). But the official line is different: Zapatero's last-minute doubts on budget reform

An hour before the session of Congress in which he announced the second reform to the Spanish Constitution since 1978, José Luis Rodríguez Zapatero was still hesitating. Aides say that the prime minister also considered the option of simply making a statement supporting the introduction of an article on budget stability into the charter, but leaving the actual drafting for after the general elections of November 20.

...

Germany had already introduced the concept in its own constitution, while France is working on it and Italy said it would, too. Zapatero, said aides, felt that Spain should be a part of this process and join other members making major decisions aimed at greater European unity.

...

"He increasingly saw that just a statement of intentions was going to be a watered-downed decision, considering the situation. On the contrary, initiating the [constitutional] reform could have a very positive impact on Europe and the markets, much more so with the support of the main opposition party," says one well-informed source.

This is probably the least ominous reason for the rush to approve this. In fact, most of the provisions of the new Constitutional amendment and impending Organic Law won't take effect immediately. The spending ceiling only becomes binding after 2020 (however, to bring a 9% deficit to 0.40% in 9 years does require reducing it by 1% per year in the middle of a recession, which will require biting austerity with immediate effect). There's only one provision of the proposed New Article 135 (in Spanish) which will have immediate effect:

Credits to service interest and principal on the public debt of the various Administrations will be understood to be part of the expense account of their budgets, and their payment will have absolute priority. These credits won't be subject to amendment or modification, as long as they keep to the conditions of the law by which they were issued.

Update [2011-8-30 3:59:57 by Migeru]: The emphasised text is what's being added by the amendment.

In other words, debt service before essential public services, added to the existing ban on debt restructuring under the Constitution. So one cannot escape the suspicion that as soon as this is in the books Spain will be subject to renewed market attack, having made the threat of default unconstitutional.

Was this part of Merkel's demands or is this a way for Spain to one-up her in "Europeanness" (believe it or not, PSOE candidate Rubalcaba has tried to sell people this reform by saying it it "pro-European" - such is the extent of Spain's European inadequacy complex 25 years after joining the EU).

The constitutional debt brake is economically illiterate even for Germany (see Fiscal Rules Going Mad on Bill Mitchell's blog) let alone for Spain. It condemns Spain (and the whole of the Eurozone, if passed in most member states) to a period of economic stagnation to rival the Great Depression. But no matter, Merkel would have us believe that up is down and left is right:

German Chancellor Angela Merkel said investors are trying to "blackmail" governments into helping debt-strapped European countries, underscoring the need for all euro-area governments to reduce debt.

"After the states bailed out the banks, the financial markets are again trying to blackmail states and tell them, `You've made so much debt,'" Merkel said today at a rally of her Christian Democratic Union in the eastern city of Brandenburg, about 50 kilometers (30 miles) from Berlin.

The solution is to press "countries that are highly indebted to really do their homework and get their debt down," she said. "A Europe with a common currency requires common duties."

There's so much Orwell here I'm surprised nobody called her to task. But, of course, she was speaking to her party faithful.

Spain and Ireland had low debts and budget surpluses on the eve of the crisis. The US financial crisis represented a collapse of confidence in private debt, not public debt. So Schaeuble is just making stuff up, inventing a crisis that didn't happen rather than dealing with the crisis that did happen.

Unfortunately, he's not alone. The fiscalization of the crisis story -- the insistence, in the teeth of the evidence, that it was about excessive public borrowing -- has become an article of faith on both sides of the Atlantic. And that faith has done and will do untold damage.

That's a really unfortunate choice of breaks for quoting Krugman. You quote

Greece

Spain and Ireland had low debts and budget surpluses on the eve of the crisis.

Krugman says

let's look at the full list of countries that got into trouble because of high debts accumulated before the crisis, as opposed to those that have developed large deficits as a consequence of the crisis. Here's the full list:

Greece

Spain and Ireland had low debts and budget surpluses on the eve of the crisis.

But do politicians themselves know that "public debt" hoax is just for public consumption? Or do they actually believe what they are saying? (Of course this difference more or less meaningless when talking about politicians..)

Compartmentalization. Krugman does not discuss the role of total indebtedness in triggering the collapse of '08. The problem STARTED as private debt which has been assumed by the states on the basis of the bogus TBTF arguments. So now we have Too Corrupt to Function or TCTF.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Displacement activity: behaviour that occurs typically when there is a conflict between motives and that has no relevance to either motive: e.g. head scratching

- The Free Dictionary

...when the Ponzi pyramid financial scheme collapses we have a Minsky moment.

- Paul Davison

Abreaction: an emotional release resulting from mentally reliving or bringing into consciousness, through the process of catharsis, a long-repressed, painful experience.

- The Free Dictionary

Richard Smith then discusses the activities last weekend at Jackson Hole, Wyoming, including Christine Lagarde's awkward truth telling, Trichet's reaction and then on to the reactions of The Serious People in Europe and the US:

This is all displacement: no one wants to recognize the losses and write off the debt, yet; not in Europe, (and not in the US, either, as we know well). There's still too much room to argue about whether it's liquidity or solvency, and about who should end up holding the bag, et cetera. Round and round it goes.

From a psychological point of view, it's as if everything before the Minsky moment was displacement activity; the Minsky moment itself coincides with the onset of abreaction. Here, via email, is an little instance of what it's like when you really run out of mental dodges; this is abreaction:

I had a convo last week with a guy that worked at a structured products advisory shop and he said that in late 2008 (post-Lehman) he was hired to look at a Landesbank's books and when the representative from the bank asked him what this stuff was worth the advisory guy said he looked at the German and said "its all worthless, maybe a few pieces will perform in the long term but almost all of it is gone" and the German guy started crying and screaming at him...

Not the prettiest moment of enlightenment, but at least the Landesbanker got there in the end. Unfortunately the wait for an honest official confrontation of the public and private debt problems in the US and Europe is far from over.

In the USA both major parties hope that wait will last until after the next election, barring a major outbreak of event risk. What Serious Person in the USA wants to be the one to drop a turd into the recovery punch bowl? (Ron Paul isn't a Serious Person.) Besides, they would then be blamed for the ensuing calamity.

Many have to understand that the situation is only getting worse. The only ones benefiting from the current "extend and pretend" life support for the TBTFs are the current executives of those institutions. But, hey, they and their buddies made 40% of all political contributions last election cycle, and who can afford to do without 40% of their contributions? (We know they would all be in the same boat. But SHUUUH!) How much worse can it be if we just wait. Maybe the system will cure itself. (Cue Happy Days Are Here Again.)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Gleichschaltung, a metaphor from electro-mechanics that might be translated by "phasing" or "synchronisation", can be politically interpreted as "coordination" or ""forcible-coordination" or "bringing into line". Taken in that general sense, it could apply to the events you're describing. But the reason for featuring it here (as your self-Godwin implies) is that the Nazis used it to refer to the process by which they created a totalitarian state in Germany.

A couple of historical reminders, one more general, the other more specific:

The rapidity of the transformation that swept over Germany between Hitler's takeover of power on 30 January 1933 and its crucial consolidation and extension at the beginning of August 1934, after Reich President Hindenburg's death and following close on the major crisis of the 'Röhm affair', was astounding for contemporaries and is scarcely less astonishing in retrospect. It was brought about by a combination of pseudo-legal measures, terror, manipulation -- and willing collaboration. Within a month, civil liberties -- as protected under the Weimar Constitution -- had been extinguished. Within two months, with most active political opponents either imprisoned or fleeing the country, the Reichstag surrendered its powers, giving Hitler control of the legislature. Within four months the once powerful trade unions were dissolved. In less than six months, all opposition parties had been suppressed or gone into voluntary liquidation, leaving the NSDAP as the only remaining party. In January 1934, the sovereignty of the Länder -- already in reality smashed the previous March -- was formally abolished. Then, in the summer, the growing threat from within Hitler's own movement was ruthlessly eliminated in the 'Night of the Long Knives' on 30 June 1934.

By this time, almost all organisations, institutions, professional and representative bodies, clubs, and societies had long since rushed to align themselves with the new regime.'Tainted' remnants of pluralism and democracy were rapidly removed, nazified structures and mentalities adopted. This process of 'coordination' (Gleichschaltung) was for the most part undertaken voluntarily and with alacrity.

(Ian Kershaw, Hitler: 1889-1936, Hubris p.435)

Specific measures taken by Hitler and the Nazis are detailed in Wikipedia:

In a more specific sense, Gleichschaltung refers to the legal measures taken by the government during the first months following January 30, 1933, when Adolf Hitler became Chancellor of Germany. It was in this sense that the term was used by the Nazis themselves.

When the newly elected Reichstag first convened on March 23, 1933, (not including the Communist delegates, since their party had already been banned by that time) it passed the Enabling Act (Ermächtigungsgesetz), transferring all legislative powers to the Nazi government and, in effect, abolishing the remainder of the Weimar constitution as a whole. Soon afterwards the government banned the Social Democratic party, which had voted against the Act, while the other parties chose to dissolve themselves to avoid arrests and concentration camp imprisonment.

The "First Gleichschaltung Law" (Erstes Gleichschaltungsgesetz) (March 31, 1933) gave the governments of the Länder the same legislative powers that the Reich government had received through the Enabling Act.

A "Second Gleichschaltung Law" (Zweites Gleichschaltungsgesetz) (April 7, 1933) deployed one Reichsstatthalter (proconsul) in each state, apart from Prussia. These officers were supposed to act as local presidents in each state, appointing the governments. For Prussia, which constituted the vast majority of Germany anyway, Hitler reserved these rights for himself.

The trade union association ADGB (Allgemeiner Deutscher Gewerkschaftsbund) was shattered on May 2, 1933 (the day after Labour Day), when SA and NSBO units occupied union facilities and ADGB leaders were imprisoned. Other important associations including trade unions were forced to merge with the German Labor Front (Deutsche Arbeitsfront -- DAF), to which all workers had to belong.

The Gesetz gegen die Neubildung von Parteien ("Law against the establishment of political parties") (July 14, 1933) forbade any creation of new political parties.

The Gesetz über den Neuaufbau des Reiches ("Law concerning the reconstruction of the Reich") (January 30, 1934) abandoned the concept of a federal republic.[1] Instead, the political institutions of the Länder were practically abolished altogether, passing all powers to the central government. A law dated February 14, 1934 dissolved the Reichsrat, the representation of the Länder at the federal level.

In the summer of 1934 Hitler instructed the SS to kill Ernst Röhm and other leaders of the Nazi party's SA, former Chancellor Kurt von Schleicher and several aides to former Chancellor Franz von Papen in the so-called Night of the Long Knives (June 30, 1934/July 1, 1934). These measures received retrospective sanction in a special one-article Law Regarding Measures of State Self-Defense (Gesetz über Maßnahmen der Staatsnotwehr) (July 3, 1934).

At nine o'clock in the morning of August 2, 1934, Reichspräsident Paul von Hindenburg died at the age of 86. Three hours before, the government had issued a law to take effect the day of his death; this prescribed that the office of the Reichspräsident should be merged with that of the Reichskanzler and that the competencies of the former should be transferred to the "Führer und Reichskanzler Adolf Hitler", as the law stated. Hitler henceforth demanded the use of that title. Thus the last separation of powers was abolished. Following the Reichswehr purge of 1938, Hitler could be described as the absolute dictator of Germany until his suicide in 1945.

I'm generally cautious about historical parallels, which almost always turn out to be inaccurate. In this case, the use of Gleichschaltung is at so many removes from the historical reality of the 1930s that its only sense is rhetorical. You may say it's not meant to shed light, but to register an angry protest. But wouldn't it be of more use to describe what is happening now in today's (and preferably tomorrow's) terms, rather than wave around the bloody flags of nearly a century ago?

Gleichschaltung, a metaphor from electro-mechanics that might be translated by "phasing" or "synchronisation", can be politically interpreted as "coordination" or ""forcible-coordination" or "bringing into line". Taken in that general sense, it could apply to the events you're describing. But the reason for featuring it here (as your self-Godwin implies) is that the Nazis used it to refer to the process by which they created a totalitarian state in Germany.

...

In this case, the use of Gleichschaltung is at so many removes from the historical reality of the 1930s that its only sense is rhetorical. You may say it's not meant to shed light, but to register an angry protest. But wouldn't it be of more use to describe what is happening now in today's (and preferably tomorrow's) terms, rather than wave around the bloody flags of nearly a century ago?

"I had a discussion with Barroso last Friday about what can be done for Greece, Spain, Portugal and the rest and his message was blunt: 'Look, if they do not carry out these austerity packages, these countries could virtually disappear in the way that we know them as democracies. They've got no choice, this is it'."

By Lorenzo Bini Smaghi (member of the Executive Board of the European Central Bank)

An oft-made assumption is that governments can renegotiate with their creditors the terms and conditions of their debt instruments without this having major repercussions on the rest of the economic and financial system. This assumption is largely based on the experience of developing countries with underdeveloped financial systems and mainly foreign creditors. What is generally not well understood is that, in advanced economies, public debt is the cornerstone of the financial system and an important component of the savings held by citizens.

As recent events have shown, the simple fear of a default or of a restructuring of public debt would endanger the soundness of the financial system, triggering capital flight. Without public support, the liabilities of the banking system would ultimately have to be restructured as well, as was done for example in Argentina with the corralito (freezing of bank accounts). This would lead to a further loss of confidence and make a run on the financial system more likely. Administrative control measures would have to be taken and restrictions imposed. All these actions would have a direct effect on the financial wealth of the country's households and businesses, producing a collapse of aggregate demand. Taxpayers, instead of having a smaller burden of public debt to bear, would end up with an even heavier one.

As opposed to what's happening now?

Many commentators fail to realise that the main impact of a country's default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.

In which country do the most vulnerable citizens own financial or real assets?

The economic and social impact of such an event is difficult to predict. The democratic foundations of a country could be seriously threatened. Attentive observers will not fail to notice that sovereign defaults tend to occur in countries where democracy has rather shallow roots.

Europeans have not forgotten the devastating effects that the expropriation of wealth, such as that carried out during the two world wars by way of inflation or defaults, may have on the economic and social fabric.

"In this union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market and a single central bank, to envisage a ministry of finance of the union?" he said as he accepted the Charlemagne prize for contributions to European unity.

...

"Looking at the euro area today, we see clearly that countries that abide by the rules of the single currency can thrive and prosper," Trichet said. "But we also see the opposite. Strengthening the rules to prevent unsound policies is therefore an urgent priority."

...

"But if a country is still not delivering, I think all would agree that the second stage has to be different," he said, suggesting that eurozone authorities be given "a much deeper and authoritative say in the formation of the country's economic policies if these go harmfully astray".

He added: "It would be not only possible, but in some cases compulsory, in the second stage for the European authorities - namely the council on the basis of a proposal by the commission, in liaison with the ECB - to take themselves decisions applicable in the economy concerned."

The Global Financial Crisis of 2007 has ushered in a Constitutional Crisis of the EU as a whole and of member state after member state (the words Constitutional Crisis have been used to describe what's going on in Greece, Ireland and Spain at some point or another, I don't know about Portugal, plus then there's Iceland drive to get a new constitution as a result of the 2008 collapse of its financial and political system). Meanwhile, the scale of the Hooverian policies being introduced and the timing has me convinced that we're looking at a Great Depression os the 2010's, however much the Serious People insist on calling it a Great Recession after trying to conjure it away with talk of green shoots in 2009. Extreme right parties are on the rise in all of Europe, and the mainstream Centre-Right is becoming increasingly xenophobic, nationalistic and protectionistic at the level of people, while it kowtows to market pressures and corporate interests at the macroeconomic level. Germany first modifies its own constitution in an insane direction and then leverages the international crisis for a forcible coordination of economic policy and a rewriting of otehr states' constitutions, while asserting the primacy of both the Bundesbank and the German Constitutional Court over not only EU policy but other member states' policies. Just last week

Merkel urges eurozone budgets court enforced - The Local

German Chancellor Angela Merkel would like to see the European Court of Justice (ECJ) play a role in enforcing the rulebook for the eurozone, particularly on limits for public deficits, deputies say.

Members of her parliamentary group said after a specially called meeting on the eurozone debt crisis with the German leader late Tuesday that the ECJ could help beef up monitoring of fiscally errant member states' budgets.

When violations of the deficit or debt ceilings occur, the court could strike down the budget in question and demand a new calculation.

"It is now Europe's duty to ensure that competitiveness can be established and that sound, necessary reforms can be undertaken," he said.

"The principle that liability and risk are linked must become the order of the day," he added, calling on financial markets to do their part for stability in the eurozone.

The day is not far when the German government will attempt to challenge other member states' budgets at the European Court of Justice, or even initiate bankruptcy proceedings against them. When the American Neocons or the Bush Administration described in detail what they intended to do, people dismissed it as extreme rhetoric, only to be shocked, shocked when they went on to do exactly what they said they would do. You are now making the same mistake with the German establishment (Merkel, Schäuble, Issing, Wulff, Weber, Stark, and the list goes on and on...)

Many commentators fail to realise that the main impact of a country's default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.

A government telling its providers to "go to the courts if you want to get paid" is basically a default. Since Spain (or its regional or local governments) are not defaulting on their bonds, this is a selective sovereign default.

A sovereign nation enters "selective default" when it elects to delay repayment of some of its financial obligations while fully honoring others.

The idea is that eventually everyone gets paid somehow. It's just in a manner different than how it's set up now.

But I didn't "tell you" that. I said I was wary of historical parallels, not that they were "out of place" by definition. And it wasn't a vague matter of "the 1930s", but specifically the Gleichschaltung process by which Germany became rapidly nazified, by simultaneous top-down and bottom-up movements, in 1933-4.

All you quote above from past ET threads I have read and take no issue with. Where I disagree with you is on whether Gleichschaltung constitutes an illuminating parallel.

As for those who were shocked by the neocons and Bushies, I was not among them. Concerning the current German establishment, what interests me is what interested me with the neocons: who are they, what are their similitudes and differences, what exactly do they think and where do their ideas come from, what aims do they have and what backing for them, what capacity do they have for ideological penetration... Now, in today's terms.

I'm not saying you don't concern yourself with those questions. But I suggest that, by choosing to use a shock-Godwinism with very specifically Nazi content, it is you who are making a mistake.

But that doesn't mean that financial capture by 'the markets' and their political cronies and toadies isn't essentially fascist, or - more pertinently - ultimately as dangerous, in a slow-boil way, as Nazi-style fascism.

What other word can you use when a supposedly sovereign country immediately modifies its constitution on demand? Anschluss?

The point here is the utter disappearance of bottom up democracy, and its replacement by market-driven policy which is at odds with the desires of an obvious majority of the Spanish population.

When the state and large corporations cooperate to manage populations at their own expense, you have fascism. It doesn't matter if it's dressed up with jackboots, window breaking and flag-waving, or with serious editorials and pompous economic word salad.

Concentration camps aren't the prime symptom of fascism. Propaganda on an industrial scale and a value system that condemns ordinary people to unemployment, crime and starvation are quite enough.

When the state and large corporations cooperate to manage populations at their own expense, you have fascism. It doesn't matter if it's dressed up with jackboots, window breaking and flag-waving, or with serious editorials and pompous economic word salad.

so true... after the london riots, 'normal' people were begging for more police to save them, whilst the police deliberately had withheld services to ensure that very reaction.

that's how it's done... make things so shitty that force is the only possible counter-reaction.

the is the result of too much stupid for too long. society eating itself...

that doesn't mean that financial capture by 'the markets' and their political cronies and toadies isn't essentially fascist, or - more pertinently - ultimately as dangerous, in a slow-boil way, as Nazi-style fascism.

What other word can you use when a supposedly sovereign country immediately modifies its constitution on demand? Anschluss?

I still think Gleichschaltung in the meaning of forcible legal realignment and policy coordination is apposite.

When the state and large corporations cooperate to manage populations at their own expense, you have fascism. It doesn't matter if it's dressed up with jackboots, window breaking and flag-waving, or with serious editorials and pompous economic word salad.

A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.

A correspondent informs me that Wolfgang Schaeuble, the German finance minister, has just given a speech asserting that excessive public debt caused the 2008 crisis. In fact, I'm told, he said that

It's actually undisputed among economists worldwide that one of the main causes - if not the main cause - of the turbulence - not just now, but already in 2008 - was excessive public debt everywhere in the world.

OK, we can prove that wrong immediately: I dispute it, Brad DeLong disputes it, Christy Romer disputes it, and I think we fall into the category of "economists worldwide".

Back to Kalecki

In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called 'economic experts' closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.

There are, however, even more direct indications that a first-class political issue is at stake here. In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.

...

One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

It's like Weltanschauung or überfordert... German is such a great language sometimes.

Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone's crisis management rather well. It is überfordert. The nearest English translation is "overwhelmed", or "not on top of something", but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante's hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow.

Give fascism a broad catchall sense if you like, but you are not addressing my argument re Gleichschaltung. If Mig had used "fascism", I wouldn't have taken issue with it (even while demurring).

You take my argument to mean that I am dismissing the danger of what is happening, but that's a strawman. My point is that Gleichschaltung is not historically analogous to what's happening now. In particular, though it was indeed associated with propaganda on a hither-to-fore unprecedented scale, Gleichschaltung had its bottom-up side and was enthusiastically embraced by many "ordinary" Germans, who were absolutely not condemned to "unemployment, crime and starvation".

The point is that (as talos says above) this one is for the historically literate. Most people have never heard of Gleichschaltung.

If you're addressing the historically literate, Gleichschaltung is not the right term to use; if you're addressing the general public, Gleichschaltung is not the right term to use. And this is not "scholarly debate".

I think emotive language can be quite useful (admitting that I am uncertain of the exact definition Logical Positivsts used), but one needs to know what emotions one wakes. As I see Godwin's law, in general any reference to nazis gives "evilness on the scale of the Holocaust" as the main connection. And as I have quipped not even the 1930ies nazis lived up to that. Most people not agreeing that X = evilness on the scale of the Holocaust will react badly to your implication that it is, even if you were just trying to say that X = aspect of nazi policy.

As an example, the Swedish Pirate Party has mostly used references to former DDR when doing examples of oppressive surveilliance. That I think is wise as former DDR is in Sweden mainly known for its oppressive surveilliance while for example Nazi Germany and the Soviet Union, though examples of oppressive surveilliance, are more known for other things, like mass murders and wars.

So back to the topic here, it might have been more useful to use Merkel expects other countries to fall in line, to form lines as straight as in the 1st of May parades of her youth in DDR if one wants to evoke a picture of oppressive commands from Germany. It is not very catchy (I had to come up with an example right now) and I have no idea of what Merkel did under communism, but it is still more precise and uas a more well known image then Gleichschaltung.

I'm generally cautious about historical parallels, which almost always turn out to be inaccurate. In this case, the use of Gleichschaltung is at so many removes from the historical reality of the 1930s that its only sense is rhetorical.

Well, yes but this sort of historical hyperbole is not unusual. See for example the only widely used term (that I can think of now) that originated with the Nazis: Blitzkrieg. Also perhaps Anschluss, maybe other terms too.

It's a historically literate way of saying "lightning fast and ominous political transformations" and given the 1930s economic atmosphere, it can be used warningly as well.

Drastic measures have been taken over the past 18 months in a variety of venues on the argument that they were needed to avert undesirable consequences that ended up materialising anyway. So, in the end, the politica transformations and drastic measures were taken for nothing.

A major point of contention in this conflict is the role of Germany as employer of last resort (or not, as the case has been for the past two decades). Given that Germany is a major player in the conflict, and given that German influence is argued here to be highly malign, comparisons with the Nazi era are - ah - not helpful.

I presume you have read Keynes' The Economic Consequences of the Peace. He makes a strong case that it was the actions of France, from the end of WW I through the 20s, based on Clemenceau's policy and goal of preventing Germany from being able again to become much stronger than France, that largely created the conditions that gave rise to the collapse of the Wiemar Republic. Of course I have been assured that Germany's current behavior is in no way related to that sad history, but it would seem to be at least a possible example of doing unto others as others have done unto you, though I am sure that this has never even crossed the minds of any current German officials. I hope.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

... "The Government has had to make a reform to transmit that Spain is a serious country that is going to fulfill its obligations", the party's Organization Secretary Marcelino Iglesias explained after the meeting. On the referendum demanded by part of the citizenry and of the PSOE itself, Iglesias justified that "the Constitution does not demand it" and, were it to be held, "uncertainty would be transmitted to those to whom we wanted to transmit certainty", that is, the markets.

Were the citizens' consultation held, he explained, the reform would not be finalised until November, and the measure would lose efficacy. The government has used the fast-track method because they want to transmit safety to the markets in face of an October that appears convulsed, with Italy, the other country on the brink of a rescue, seeking financing of its debt.

...

Urgency has marked the decision-making, according to Iglesias. First, he claimed, action was needed. Then explanation, which is what the two meetings called for this afternoon are for. At 5pm, Rubalcaba will meet the regional Barons in the PSOE headquarters, and at 8pm, he will meet the Socialist parliamentary group, to explain how and why the latest decisions were taken which, he claims, "the Executive [Committee of PSOE] has backed".

ZP is clearly bought and paid for, OR being blackmailed, OR he's a drooling centrist moron who has drunk enough of the KoolAid to use it instead of blood.

Whatever the truth, it's interesting that his decisions and actions seem eerily similar to those of Blair, Obama, Clegg and others who were elected with a nominal left-leaning mandate, but have unapologetically governed from the right.

My basic sense is that we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances.

To summarize, my predictions are:

....

European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.

Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.

Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.

IMO, this COULD be a good thing. Globalization has chiefly served to enable holders of large amounts of capital to confound any attempts at regulation by individual nations, whose average citizens have been regularly and repeatedly raped by the international corporations which are the vehicles for the large holders of capital.

The real basis for creation of capital is the power of the state to creatively reorder the society to suit the needs of the business enterprises within it. This has been done exclusively in the interests of those businesses and with disdainful disregard for the needs and interests of all but those with existing capital. The most recent phase of that process has, effectively, put to sleep the powers of the state to act in the interests of any but those with capital. This has been definitively accomplished by the almost total capture of the states.

Winding down globalization will not cure the problems that afflict our societies, but it does create the space for solutions to be implemented. In order for that space to be utilized large numbers of the electorate in individual countries have to realize the potential they have to shape their society and lives and must use that opportunity effectively. The alternatives are a collection of individual authoritarian states. An individual authoritarian state does not have to have a mad expansionist goal in order to make life miserable for the vast majority of its citizens.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

In the end, the tremendous market instability experienced in August, when Spain's risk premium shot up to 400 basis points, convinced the Socialist that he had to send out a powerful message about the country's commitment to financial solvency. (Emphasis added.)

So, in search of financial solvency they commit financial suicide by strangulation. Please tell me that Zapatero is not from La Mancha.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

But a balanced budget for a sub-sovereign state is by no means unusual or unreasonable ~ its only problematic in this case because the sub-sovereign state has surrendered its sovereignty to a system built broken from the outset.

The most important consequence of running the state like a private firm is that the state should not be in the business of providing free or implicit guarantees of any kind, as these are large "contingent liabilities" threatening to bankrupt the state. The threat of bankruptcy is real, as the state must fund itself by borrowing from private lenders, unable as it is to create money to fund necessary expenses deriving from the exercisising of implicit guarantees. One alternative to bankruptcy is default, but this is considered unthinkable as defaulting on obligations to fellow EU member states is "uneuropean". In addition, countries with a large primary trade deficit may find it impossible even to default.

So, what kinds of implicit guarantees are Eurozone governments providing that they shouldn't be in the business of providing? I can think of half a dozen off the top of my head:

deposit insurance for banks

granting limited liability to businesses

disaster relief

access to health care

access to education

access to legal redress

public safery

All of these are implicit guarantees that every citizen in Europe expects to enjoy relatively free of charge. These are large contingent liabilities of the state. Any and all of them could not be undertaken by a private entity that didn't charge hefty fees up front and wasn't adequately capitalised in case a particularly large claim presented itself. Would you pay a savings deposit insurance premium to an inadequately capitalised insurance company? (not that "sophisticated investors" didn't do exactly that when they bought CDS "protection" over the past 10 years) Would you incur risks with a full-liability entity having less capital than your potential loss? Would you trust you can be rescued from a disaster by an entity without the capital and operating income to actually fund a rescue operation? How about health insurance from an entity without the resources to pay for the treatment? How about your right to file a complaint to an entity without the necessary money to operate a grievance handling system? How about contracting physical security or firefighting services from an entity without the operating income to actually deploy security or firefighters?

Certainly the party political scene, in the event of a eurozone blow-up, would be pretty horrible for some time. But what can't be done in terms of "balancing the books", won't be, any more than the Maastricht Criteria 3 and 60 -- though binding on signatories at a high legal level -- have not been and are not observed, including by Germany.

But this observation does not tell you that sanity will prevail in the end. It is also possible that the right wing wins, which will create an endless string of currency crises for the IMF and its assorted EU clones to "resolve," in a manner that will seem highly familiar to any Latin American expatriates living in Iberia at the time.

Eventually, matters will come to a head and a stable resolution will be found. Unfortunately, installing some pliable tin-pot dictator who rounds up dissidents in football stadiums is one form of "stable resolution."

You're quite right, it doesn't tell you what might happen in the end, though repeated currency crises could happen with or without the constitutional amendment. Or, if we assume the right chose to practise the politique du pire, they wouldn't need to call on the constitutional amendment to shrink the state and destroy redistributive policies, thus creating social unrest and leading to a football stadium "stable resolution". And, unfortunately, the PP seems animated by pretty shadowy intentions.

A great deal depends on the extent to which, among the Spanish people as a whole, the C20 history of Spain, starting from the 1930s, is now felt to be a closed book - or, to the contrary, is still unresolved and therefore alive. The right has certainly been pushing the latter term. Which is more worrying, imo, than the constitutional amendment.

Zapatero himself is proof positive that the C20 history of Spain, starting from the 1930s ... is still unresolved and therefore alive. His Law of Historical Memory is, appraised coldly, a Law of damnatio memoriae. Judge Baltasar Garzon was banished from the judicial profession for daring to open a case on Franco's crimes against humanity. The digging up of mass graves from the Civil War continues to be a contentious issue. And just like Thatcher's tories managed to insert into the British conventional wisdom the lie that Britain is no longer a class-based society, the PP and its sociological and voter base are convinced that the wounds of C20 are closed and Zapatero has reopened them, while most of the left is aware that the wounds were never closed. But, IMHO, damnatio memoriae is not the way to go and it is not even feasible since the heirs of Franco have not been defeated to the point where you can apply damnatio memoriae.

The church no longer dictates how people live - but its success in lobbying Spain's government should not be underestimated

...

The issue is power, and the Spanish church has an awful lot of it, but it lies somewhere else. Its kingdom is of this world. As a reaction to secularisation, the church has become an American-style political lobby, which no longer shepherds souls but votes. With its radio and TV stations and its vast network of schools and universities, it shapes the conservative political camp. It is its ability to deliver busloads of school children to Madrid that makes rightwing demonstrations possible and massive.

...

And this is what World Youth Day was about: the joy of triumph and the anticipation of more concessions to come from the next government. Journalists scrutinised the long and repetitive speeches of the pope as if they were all about theology, but they weren't. The medium is the message. The message is the massive presence, like a seraphic version of the International Brigades, of the Catholic church on the streets of Spain, the old faithful country gone astray.

Constitutional literalism again. What matters more, as I've said elsewhere, is the balance of power, the ideological climate, the extent to which the people are willing or not to enter into serious conflict. Which is why what Migeru says just above is more worrisome than a constitutional court.

A great deal depends on the extent to which, among the Spanish people as a whole, the C20 history of Spain, starting from the 1930s, is now felt to be a closed book - or, to the contrary, is still unresolved and therefore alive. The right has certainly been pushing the latter term. Which is more worrying, imo, than the constitutional amendment.

IMO, the constitutional amendment is more worrying BECAUSE the right has been pushing issues that keep their interpretation of "the wounds of C20" alive. It is beginning to appear that the death of Franco was more of a stragegic detante accepted by the right in recognition that they could no longer govern with such adamant defiance of others than a real victory by the left. The right may well have just been biding its time until they had the opportunity to tar the left with some bogus smear and reclaim dictatorial power. Chile may be further along in dealing with the legacy of Pinochet than is Spain in dealing with the legacy of Franco.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

There's no "but" there. That's what I said: the reason its problematic is because when Spain surrendered its sovereignty, it surrendered it to a sovereignty that was dysfunctional by design. If the sovereignty was not dysfunctional, there'd be no issue of what happens when Spain pulls out of the Eurozone, since there'd by no need to pull out.

Debts that can not be repaid will not be repaid. Attempts to repay them that involve throwing a qualified majority of the citizenry into abject poverty will create a constitutional crisis.

If the sanity-based side wins that constitutional crisis, Spain's creditors will be told to fuck off. If the insanity-based side wins the constitutional crisis, there will be another one, and another one and another one, until either the sanity-based side wins or the insanity-based side starts rounding up dissidents and shooting them.

For a federal republic like Spain and Germany, loss of territorial integrity becomes a credible scenario if the federal and some local levels end up on different sides in the constitutional crisis.

One way or another, the Spanish body politic will be writing itself a new constitution before 2050.

"Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years."

What sort of retaliation would that be? Tariffs? Cut off energy or food supplies? Seems to me that if Germany has a globally competitive economy, there's not much that the rest of Europe can do about it.

Seems to me that if Germany has a globally competitive economy, there's not much that the rest of Europe can do about it.

i agree, the rest of europe can suck eggs, from their point of view, the periphery is tapped out as luxury goods market asia and brazil can keep them in the style they're accustomed to.

and just to balance out the germany bashing here a bit, it's not their fault that the PIIGS are less responsible, civic minded, industrious or thrifty, and more corrupt, but it was tolerable when there was money to be made, during which period the euro was a convenient tool, now no longer necessary.

it's not that they want to throw the rest under the bus, it's just time to move on to more avid market, and for that the PIIGS are so much ballast to be jettisoned, nothing personal, just bidnis...

the vaunted european union of common cause was probably a convenient fiction for the movers and shakers all along. that fiction was perceived as reality by millions of dewy eyed believers (myself included), and now there is a huge bureaucracy of EU technocrats geared to protect and ameliorate the lives and rights of EU citizens, setting a good example for the world in many fields, such as alt energy. you're not going to be able to crash all that good will and earnest politicking very easily.

what will be telling is if, faced with the great leap backward that the european state collapsing would be, if enough populist goodwill for the ideal european union project could build to thwart the purely mercenary motives spawned by the neo-lib political capture of those even token leftwing parties here.

i pray that the fiction, born to delude, will have planted itself into so many citizens that they are willing to peacefully take to the streets, to force the hand of those who thought they could dangle a dream in front of gullible, wartorn millions, and then jerk it away as soon as a whole generation has been raised as much 'european' as french or german etc.

perhaps then pols will learn a lesson about keeping promises... europe may need to almost completely founder before mass consciousness awakes to realise what we are in danger of losing, when we had barely begun.

"Globally competitive" is a function of exchange rates precisely as much as of price levels, and at least as much as it is of the quality of your manufactures. Countries subject to German wage suppression driven mercantilism can retaliate by discounting their currencies until they have restored foreign balance. Indeed, in a true floating currency system they do not even need to actively retaliate, as this is the equilibrium condition for a floating rate system.

But we continue to avoid a true floating-rate system. Since Bretton Woods ended we have seen 40 years of surrogates of fixed exchange rate systems. Possibly because Central Banks don't want to, or don't know how to, regulate and then hedge against the foreign currency exposure of their domestic economies.

«There was no negotiation» but a list of tasks for our country, [Trichet] said off-mike minuted before [his appearance at the European Parliament] to the vicepresident of the Committee on Economic Affairs, José Manuel García Margallo, as the PP MEP told this paper. Though he didn't clarify to the MEP or to the rest of the Committee whether it was by letter, the "clear message" was that Spain must adopt a commitment with budget stability for the ECB to embark on bnd purchases to mitigate investor mistrust two weeks ago.

...

The spokesman for the Socialist government, José Blanco, denied last Friday in the pess conference after the Council of Minister that the BCE had asked Spain for a change in the Constitution to slow down the deficit. «I am not aware of the existence of a letter from the BCE» to Spain, Blanco claimed then.

La Razón is not the most credible or less tendentious newspaper on the planet, but...

When I complained some time ago about the language here, everybody attacked me and demanded "proof" for my accusations.

And I now I take a look back and find another bout of nationalistic germanophobia, garnished with conspiracy theories. There is nothing wrong with the world that can't be blamed on a sinister german cabal, it seems.

What's next on the this meeting place of the "left"?

Blaming Free-masons, templars, illuminati?

You are led by your domestic plutocrats by the nose, all the time babbling about the "EU" and the "germans".

Now just a minute. I have argued patiently in this thread and elsewhere against the use of Nazi terminology in speaking of modern Germany, and part of this thread is, it seems to me, an intelligent discussion of the question.

However, are you denying that the "debt brake" constitutional amendment that is the subject of this diary, finds its origin in Germany, and that Merkel and the German government have clearly expressed the wish to see it introduced in all eurozone countries?

There are no conspiracy theories here, there is no reason to bring in the freemasons or the Illuminati. The current ideology, the official policy, and, apparently, a large proportion of the public opinion of Germany are quite sufficient.

The whole post is titled "Gleichschaltung" and I shall calm down? Blaming the messenger.

The debt brake is popular in Germany. But then all kind of nonsense is popular. As our american friends can tell us, a balanced budget amendment is an eternal favourite among american politicians because this kind of stuff is popular. Do you want to claim that the tea party, "cut, balance and amend" etc. are german imports to american politics?

Westerwelle indeed bragged just mow that the german government induced other countries to introdurce debt brakes. But so what? the man is an inveterate liar.

"The fault, dear Brutus, is not in our stars,
But in ourselves, that we are underlings."

22 or so of the 27 countries of the EU are governed by right wingers. Blame them and the citizens who voted them in and who like simplistic blather about debt, for austerity debt brakes etc.

We told Jerome two years ago that they would come for France. He didn't believe it. France was not Greece, we were told. "Niemöller moment" is precisely the right term for the shocked realisation that they are in fact coming for France now.

We even called the order in which they would come for Eurozone countries after Greece: Portugal, Spain, Italy, France, with Belgium either just before or just after Italy, depending on how much being white and speaking decent English counts for. And lo and behold, it happened exactly as predicted. Because we were right in our fundamental analysis: This is not a debt crisis. It's a currency crisis with some cheap lipstick smeared on.

The people who claimed that this was a debt problem and (implicitly or explicitly) that the ECBuBa would not thrown France under the bus were wrong.

So maybe, just maybe, you should put your righteous indignation on hold long enough to consider the possibility that we may have an objectively superior understanding of what is going on here than you do, and than the people you usually get your news and views from do. We certainly have a better track record at the whole "empirical predictions" thing.

Incidentally, the fact that it is a currency crisis and not a debt crisis means that Germany bears the lion's share of the blame for it. For the precise same reason Germany bears the lion's share of the responsibility for the breakup of the ERM in 1993: Germany has the largest internal current accounts surplus, which means it falls to Germany to perform employer and market maker of last resort functions. That's not just some arbitrary rule or distributional policy demand - it's a fundamental requirement for a stable currency union.

You don't understand the simplest things. Superior, m<y god. <br>
Look: "he people who claimed that this was a debt problem and (implicitly or explicitly) that the ECBuBa would not thrown France under the bus were wrong."

Let's ignore your obsession with a defunct central bank for a moment. Henkel is not "them". He hasn't mattered since the last century. He is an entertainer, a talk show habitue. Whoever "they" are in you imagination, Henkel is really not a part of it.

Or did conclude that corporate america wanted to annex the libyan oil when Donald Trump propoes that? Henkel is the Trump of german business. Nothing more.

And crowing we were right all along and that gives us a right to use nazi metaphors by the barrel based on the ramblings of a clapped out has been is quite premature.

We understand that this sort of nationalist whining appears every time the focus is on one government or another. We get it: be nice and civil and don't criticise anyone except in the mildest terms. Even if they are a crowd of cargo cultists intent on exploiting xenophobia for their own personal gain despite the risks for the entire European project and the people thereof. It's more important to be civil than right, eh?

It is important to use the right words. Fascism has a meaning. And blaming spanish decisions on Germany is nationalistic whining. "Der Hauptfeind steht im eigenen Land", you know, and that should some remember here from time to time.

No.
But can't you critizise him without calling him a german puppet and using terms like Gleichschaltung? The last time we argued about this you set out to critizise Sarkozy, but then mostly talked about "Frankfurt" anyway.

So if you stop using Gleichschaltung and Untermenschen and calling the ECB Bundesbank I would be happy enough.

But can't you critizise him without calling him a german puppet and using terms like Gleichschaltung?

I do, when he isn't reforming the Constitution in a rush while the Parliament is in recess and most people on vacation, on the sternly worded request of Merkel, Sarkozy and Trichet.

Do you want to see some criticism of Sarkozy with no blaming of Germany? Try this one from a month ago. To each their own, when they deserve it.

Here's some fun criticism of Zapatero on the eve of the Irish "rescue":

Zapatero, the last best hope of Social Democracy in Europe [sic], joins forces with the Conservative-Neoliberal governments of Germany, France, Britain and Italy in a futile attempt to protect his own bond spreads, only to find a few weeks/months from now that the other 4 larger economies hang him out to dry...

Because France is not Italy is not Spain is not Portugal is not Ireland is not Greece...

You see, my ranting and raving has been consistent for 18 months now, and unfortunately it's also been predictive, too.

But, really, it appears that Zapatero has done whatever Merkozy have told him to do since May 2010, so they're all inseparable. And, given that, one has to criticize the ones calling the shots even if they happen to be German.

Don't be petty. I am not the one running around and blaming a foreign country for everything. I just tend to point out that only two of the 18 people making decisions at the ECB are Germans. And Weber is history.

1) The BuBa owns 20% of the ECB's capital (~GDP in the EU27), so it is not farfetched that they have disproportionate influence on decision-making; 2) going by the public pronouncements of the people involved, the Germans have been notorious for public breaches of ECB council collegiality, undermining or delaying ECB action repeatedly in this crisis; 3) we're still pretty much living with the non-petty economic consequences of Herr Weber.

Do you really think it is wrong that the largest economy in the Eurozone has some influence? And capital doesn't vote the heads of the central bank do.

"2) going by the public pronouncements of the people involved, the Germans have been notorious for public breaches of ECB council collegiality, undermining or delaying ECB action repeatedly in this crisis;"

In your hate of the Bundesbank you don't seem to see what is happening here: The yare losing and try to use extraordinary means tp compensate for the fact that at the regular CBE decisison nobody listens to them.

3) we're still pretty much living with the non-petty economic consequences of Herr Weber.

Do you really think it is wrong that the largest economy in the Eurozone has some influence?

I think it is wrong that incompetent fuckwit ideologues have any influence at all, let alone disproportionate influence.

And the highest concentration of incompetent fuckwit ideologues East of London happens to be in the BuBa.

And capital doesn't vote the heads of the central bank do.

Yeah, yeah, on paper.

Just like, on paper, every NATO member has veto rights over foreign adventures.

The Americans call that sort of kabuki theatre "legal fiction."

In your hate of the Bundesbank you don't seem to see what is happening here: They are losing and try to use extraordinary means to compensate for the fact that at the regular CBE decisison nobody listens to them.

On what planet do you spend most of your time?

The ECB's playbook for this crisis has been a virtual carbon copy of the Bundesbank's playbook for the 1993 ERM breakup. And every single time the ECB has deviated a single millimeter from the BuBa 1993 playbook, the incompetent fuckwit ideologues at the BuBa have pitched a public hissy fit. In direct violation of the rules of confidentiality that the same incompetent fuckwit ideologues insisted on to begin with.

If the ECB had consistently overruled the BuBa, not a week would have gone by without a BuBa hissy fit. The fact that we only have about one hysterical tantrum a month demonstrates that the other 22 business days in each month the ECB is toeing the BuBa line to the letter.

You mean Trichet.

Yeah, him too.

But the thing about responsibility for fuckups is that it does not become more diluted by being spread out over more people.

Hypothesis: The ECB's decisions should not conform to longstanding BuBa policy more often than would be the case by random chance.

Empirical reality: The ECB's policies conform to longstanding BuBa policy with very few exceptions, and when one of these exceptions arises, the BuBa throws a histrionic tantrum as if their most sacred and fundamental rights have been violated.

Conclusion: The theory is falsified.

You can repeat the fact that the BuBa has only one vote on the board until you go blue in the face. That does not change the readily observed fact that the BuBa is setting policy.

And I really don't care whether they do that by bullying the rest into line with their supposed Seriousness; by packing the analysis staff with their insane Hayekian crackpots (but I repeat myself); or even by plying the other members with hookers and cocaine (although the latter would admittedly be the more entertaining version).

I care about the fact that they are setting policy. Because their policies are not sanity-based.

or even by plying the other members with hookers and cocaine (although the latter would admittedly be the more entertaining version).

The central difficulty in writing a novel about the current ongoing crisis is finding a plausible explanation for the ECB's decisions. This one works better than any of the others I have played around with.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

But it is not. A foreign country that is, it is another state in a somewhat federal construction. Do you similarily find it unfair when criticism against certain aspects of US policy is formulated in terms of Texas billionaries?

Don't you see the problem? oppose Rick Perry, he is one og this crazy texans like Bush. Fine. But that keeps you pretty helpless against Mitt Romney, very much not a Texan. The more thoughtful american progressives are against this kind of rhetoric, Texas this and the south that. Rightly. Right-wingers are all over the US and most of the leaders actually dwell in New York or DC.

So your opinion - it is all right to blame " Germany" for everything, it will hit some of the right people - is quite self-destructive. It lets right-wingers in the rest of the EU of the hook. That is enabling one of the oldest right-wing tactics, to blame everything on outsiders (bicoastal eleites, new York, Hollywood)

Nobody here is engaging in nationalist attacks on "Germany", a "foreign country". Or if they are, they are doing so from about nine distinct national chauvinist positions, which would be quite extraordinary. We are all convinced European federalists here (any dissenters will be taken outside and shot...)

Would it help if we only criticized bloody-minded austerian policies by quoting German sources?

Writing an Op-ed in mass circulation daily Bild FDP's honorary chairman Hans-Dietrich Genscher launches an emotional appeal to the Angela Merkel's coalition to vote for the German law enhancing the EFSF. "Whenever Europe was confronted with a crisis in the past the answer was: with more Europe out of the crisis", the former foreign minister writes. Confronting the eurosceptics whom Genscher calls the "paymaster-agitators" he writes: "As Europeans we have been able to reach a so far unknown wealth in a common internal market with a stable currency", he goes on. He reminds them that because of Europe, Western Europeans were able to overcome the cold war divisions and invite in the Eastern neighbours. "All parliamentarians in Bundestag should be aware of the decision's significance for future generations", he concludes.

Poor old Genscher. The current FDP doesn't much resemble that of the seventies.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

"Einführung von Schuldenbremsen in allen Mitgliedsstaaten" that is introduction of debt brakes in all member countries of the EU. That is hardly a critique of austerity.

On topic: I just want to dial you down all that nazi rhetoric like "Gleichschaltung". And I don't think it is good in the long term not to fight wrong policies in your own countries. What's so defensive about that? Defensive is to not accept the slightest bit of critique on even your phrasing.

I don't think it is good in the long term not to fight wrong policies in your own countries.

What on earth makes you think that the various Eurozone nationals participating in this thread are not fighting wrong policies in our own countries? There is ample evidence to the contrary. Why do you persist in your patently absurd assertions that "everyone" on ET ascribes blame exclusively to German policies and policymakers? Is it your assertion that commenters may only criticize policymakers of their own nationality? How, then, may we comment EU affairs?

On my topic :

The Merkel/Sarkozy line is hugely damaging to Europe, I think we can agree on that. But there is worse : the FDP wrecking-ball approach. Genscher is pleading for a return for an at least ostensibly pro-European approach from the FDP, like in his days; but I'm afraid that party doesn't exist any more.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

Then perhaps you and others should say it and not silenty accept the use.

One frequent poster here uses terms like Gleichschaltung and untermenschen. Another one is so obsessed that he can't talk about the real ECB and the real Euro. but talks about the defunct Bundesbank and the abolished Mark. A third did post a picture of Hitler and Petain and compared them to Merkel and Sarkozy.

Patently absurd?

"Is it your assertion that commenters may only criticize policymakers of their own nationality? How, then, may we comment EU affairs?"

No, but only blaming politicians elsewhere, using every op-ed by some german as an expression of german policy, talking about "Frankfurt", arguing like Merkel is some kind of dictator, assuming she is not just one out of 27 head of governments but the only one is nationalistic blame shifting, scape goating and not really the behaviour of federalist europeans.

Re: FDP: They seem indeed to be the most anti-european party in Germany right now and compared to them Genschers op-ed was indeed gradually better.

arguing like Merkel is some kind of dictator, assuming she is not just one out of 27 head of governments but the only one

Over the past 18 months, increasingly Merkel and Sarkozy have been dictating EU Council policy, and organizing a string of bilateral summits (starting with Deauville last Autumn) where the next step in EU policy is announced to the world (and the Council).

In the case of the July market crisis, when it first flared up Sarkozy wanted to organize a summit to discuss Spain and Italy (yes, Italy is under Market attack and has been for nearly 2 months, at least as far as Sarko is concerned) and Merkel first 1) said she wouldn't attend because there was nothing to discuss; 2) hid behind Greece (she said she wouldn't even attend a second summit a week later unless a deal for Greece had been hammered out by then; 3) then ensured that the 21 July summit discussed nothing but Greece so it had to wait until the market meltdown of August 5 before Merkel and Wiedmann agreed to even acknowledge that the market was now attacking Spain and Italy and that the EFSF was dead in the water.

I said in mid-July that the Council should have called Merkel's bluff and met without her...

No, I just think he's the conductor on the right-wing Conventional Wisdom bus that Merkel is driving. The passengers could get off, but they're too chicken-shit to do so or they basically agree with the driver's choice of route.

By the way I already told what the opposition in Germany wants Eurobonds - transaction tax - Marschall plan financed by said transaction tax.

In the first place, if you can fund a Marshall plan type of project with a transaction tax, then your transaction tax isn't high enough. Because the whole point of a financial transaction tax is to kill the noise traders stone cold dead. Which, if it works as desired, also kills the base for that tax stone cold dead.

In the second place, even if they design a financial transaction tax to extract the maximum possible receipts, rather than impose the maximum possible harassment on noise traders consistent with not harassing productive businesses, revenues will not suffice to fund a Eurobancor. Even in the most optimistic possible estimate (where the Eurozone financial sector is assumed to contribute roughly half of the £ 250 bn that the Robin Hood Tax people guesstimate could be raised globally), it will fall short of plugging even the German CA imbalance (currently around $ 180 bn), to say nothing of the aggregate imbalances.

So while a Tobin tax is an excellent idea that will solve a great many problems, the biggest problem is not one of them.

In the first place, if you can fund a Marshall plan type of project with a transaction tax, then your transaction tax isn't high enough. Because the whole point of a financial transaction tax is to kill the noise traders stone cold dead. Which, if it works as desired, also kills the base for that tax stone cold dead.

ATTAC and others make the mistake of seeing the Tobin Tax as a revenue generating mechanism which was never Tobin's intention when proposing it...

I don't know what Sarkozy is thinking. In May 2010 he reportedly threatened to quit the Euro right there and then if Merkel didn't play ball and managed to extract the creation of the (flawed) EFSF as a result. Since then, he's been soft like a kitten.

I still don't think that any of them are thinking, exactly. They're fighting for their own political survival and their legal survival after they leave power. What are the odds that an unfriendly successor government couldn't find lots of grounds to prosecute a worm like Sarko?

That is another thing I try to explain from time to time. The current german government isn't strong, but rather quite weak. And weak governments tend to plan from day to day, in other words not at all. They don't really think about other european countries, they think about the next state election.

So I tend to protest if I read analyses of the sort, Germany is planning this and wanting that. The current isn't planing and wanting mostly negative things, like to be left alone or to kick the can down the road so that they can concentrate on the coalition crisis.

And I think this is an important reason why many Europeans, especially on the left, currently identify "German policies", or even (shudder) "Germany", as the villains in the current crisis, rather than blaming Merkel and Sarkozy, for example.

Bear with me for a minute : Merkel, who visibly doesn't have any ideas of her own on macroeconomic policy or currency governance, muddles along making non-decisions, digging her heels in stupidly, delaying then accepting the inevitable, but too late to stop the crisis getting worse... but all the while working within the framework of conventional economic wisdom in Germany.

And as Germany is the economic hegemon within the Eurozone (as largest economy, and most "virtuous", since they are on the credit side of the imbalances), German conventional wisdom, in all its majestic stupidity, is the EU orthodoxy.

It's the madness of this conventional wisdom that we must fight. You are quite right that the conventional wisdom is widely shared by economic policy makers and political elites in other countries (though we may note that the French PS has rejected the "golden rule" that the SPD embraced).

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

"3) then ensured that the 21 July summit discussed nothing but Greece so it had to wait until the market meltdown of August 5 before Merkel and Wiedmann agreed to even acknowledge that the market was now attacking Spain and Italy and that the EFSF was dead in the water."

But the initially german line - no summit - had be abandoned. Hardly a proof of dictatorship.

"I said in mid-July that the Council should have called Merkel's bluff and met without her..."

Well, that is their problem, right? Any way it wasn't necessary; Merkel did give in.

Markel did give in to what? To meet and talk about nothing but Greece's second loan tranche when everyone else was worried about whether the EFSF would die of indigestion from having to swallow Spain and Italy?

One frequent poster here uses terms like Gleichschaltung and untermenschen. Another one is so obsessed that he can't talk about the real ECB and the real Euro. but talks about the defunct Bundesbank and the abolished Mark. A third did post a picture of Hitler and Petain and compared them to Merkel and Sarkozy.

We have now beaten the Nazi terminology complaint into the ground. It is clear that the use of such terms is not accepted without debate on this blog.

The "real ECB and the real euro" are simply your version of them. Others have a right to have a different version.

The picture of Hitler and Pétain, you well know, was not accepted and was troll-rated.

It would be better if the use of such terms were without debate not accepted.

The fact that Migeru is objectively correct on the substance and has been making accurate predictions on this matter since 2008 makes most people here willing to tolerate antics that would not be tolerated from less valuable contributors.

Because being objectively, empirically correct actually matters around here.

>The "real ECB and the real euro" are simply your version of them. Others have a right to have a different version.<

But there is an objective reality.

Which is that the ECB is handling this entire crisis in precisely the same way the BuBa handled the 1993 crisis.

The law is a statement of intent, not an objective reality. The European Council can propose a treaty change that repeals the law of gravity, it can pass referenda in every single member state and be adopted with the force of national constitution everywhere on the subcontinent...

... but rocks still fall down when you drop them, and the BuBa still has an influence that is out of all proportion to the value of its contributions.

"makes most people here willing to tolerate antics that would not be tolerated from less valuable contributors."

Quod licet jovi, non licet bovi? Perhaps I am just to egalitarian for such maxims.

"Which is that the ECB is handling this entire crisis in precisely the same way the BuBa handled the 1993 crisis."

The ECB is doing what it is doing because its member countries did pack it full of right wing ideologues.
A fact you tend to ignore.

"The law is a statement of intent, not an objective reality.""

No, most laws, especially the laws that create institutions do create an objective reality.

"The European Council can propose a treaty change that repeals the law of gravity, it can pass referenda in every single member state and be adopted with the force of national constitution everywhere on the subcontinent...

... but rocks still fall down when you drop them, and the BuBa still has an influence that is out of all proportion to the value of its contributions."

You really are the last believer - and it seems to be theology with you - in the myth of the bundesbank. The supposed influence of the Bundesbank is a natural law now? Oh, you are not a orthodox believer, but a heretic: The Bundesbank is in your mythology not an angelic, but rather a satanic power. But in the kingdom, the power and the glory of the Bundesbank you still believe. EWven the people at the Bundesbank temselves are probably not that fervent believers.

A question: If the Bundesbank is all powerful, why did Weber resign? He was frustrated not getting his way at the ECB after all and did give the chance to lead the ECB away. Is he clinically insane? Or did he indeed did not get his way time after time at the ECB, leading to frustration?

"makes most people here willing to tolerate antics that would not be tolerated from less valuable contributors."

Quod licet jovi, non licet bovi?

shrug

There's a single rule for everybody: Thou shalt improve the signal to noise ratio of the site. Posting puerile Nazi comparisons alongside insightful deconstructions of prevailing policy is a net improvement in signal to noise ratio compared to posting nothing. Posting puerile Nazi comparisons with no offsetting contribution of positive value is a net loss of signal to noise ratio compared to posting nothing.

Posting insightful deconstructions of prevailing policy without puerile Nazi comparisons improves the signal to noise ratio compared to posting them with puerile Nazi comparisons. But people are not paid to contribute, so if they insist on reducing the value of what they freely give by shitting on it, then we have very little sanction that can be gainfully applied as long as the final contribution remains net positive value.

The ECB is doing what it is doing because its member countries did pack it full of right wing ideologues.
A fact you tend to ignore.

Because clearly the European right wing is a monolithic hive mind that has no internal class and national conflicts?

Now who's talking conspiracy theories here?

If the Spanish plutocrats have as much influence on ECB policy as the German plutocrats, then why does all the money end up in Frankfurt?

No, most laws, especially the laws that create institutions do create an objective reality.

That does not mean that the objective reality they create can be divined from the text of the law.

A question: If the Bundesbank is all powerful, why did Weber resign?

His arrogance and mental instability made him many enemies. When he went and contradicted something Merkel had said publicly, "many" turned into "too many."

He was frustrated not getting his way at the ECB after all and did give the chance to lead the ECB away. Is he clinically insane? Or did he indeed did not get his way time after time at the ECB, leading to frustration?

Is a homeopath who truly believes in his nostrums clinically insane? Does it matter?

Weber was accommodated far beyond any reasonable limit. But when you insist on attempting to repeal the rules of arithmetic and throw an infantile tantrum every time someone points out that this might be a bad idea, then eventually enough people get tired of you that you are purged. This is less proof of Weber's lack of influence than of his inability to function outside his Hayekian echo chamber.

No, but only blaming politicians elsewhere, using every op-ed by some german as an expression of german policy, talking about "Frankfurt", arguing like Merkel is some kind of dictator, assuming she is not just one out of 27 head of governments but the only one is nationalistic blame shifting, scape goating and not really the behaviour of federalist europeans.

You mean someone who has decided to bully the other members (with the exception of France) into writing economic insanity clauses into their constitutions isn't acting like a dictator?

The fact that there's a remarkable lockstep on both sides of the Atlantic hardly absolves Merkel of quasi-imperial drooling tin pot idiocy.

But you seem to think Germany has nothing to do with this and is barely even a side player.

Nobody's "Blaming 'Germany' for everything" - I always say who said what that is being objected to. But, taken as a whole, a lot of the people calling the shots are German. For instance, I blame Merkel for a bunch of things. Just today:

"We must make it very clear to people that the current problem, namely of excessive debt built up over decades, cannot be solved in one blow, with things like euro bonds or debt restructurings that will suddenly make everything okay. No, this will be a long, hard path, but one that is right for the future of Europe."

According to reports, she actually proposed to introduce a Constitutional Debt Brake at the EU level.

In any case, the insistence that the current problem [is] excessive debt built up over decades is demonstrably false. But debating this point is like talking to a dining room table

We talk about the euro crisis. They say, "Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules." I say,

No fiscal rule would have constrained the Spanish housing bubble and its consequences.

And they say, "Thank you for your contribution. Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules."

...

The blue line is Germany; the red line is Spain.

And, yes, this is mostly coming from Germany and it's coming from everyone who is anyone in Germany. Hey, even you agree that the problem is debt. More Krugman

A correspondent informs me that Wolfgang Schaeuble, the German finance minister, has just given a speech asserting that excessive public debt caused the 2008 crisis. In fact, I'm told, he said that

It's actually undisputed among economists worldwide that one of the main causes - if not the main cause - of the turbulence - not just now, but already in 2008 - was excessive public debt everywhere in the world.

OK, we can prove that wrong immediately: I dispute it, Brad DeLong disputes it, Christy Romer disputes it, and I think we fall into the category of "economists worldwide".

As Wolfgang Münchau put it in 2009: Berlin weaves a deficit hair-shirt for us all - yeah, that's right, none of this forced march to constitutional balanced budget reforms would have happened if Germany hadn't gotten the ball rolling and, moreover, continued to argue for its necessity and used the Euro crisis as a stick to force other countries to do it.

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike EuropeâTMs stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.

...

I am a little surprised not to hear howls of protests from France and other European countries. Germany has not consulted its European partners in a systematic way. While the Maastricht treaty says countries should treat economic policy as a matter of common concern, this was an example of policy unilateralism at its most extreme.

...

While the balanced budget law is economically illiterate, it is also universally popular. ...

This general level of debt-aversion is bizarre. Many ordinary Germans regard debt as morally objectionable, even if it is put to proper use. They see the financial crisis primarily as a moral crisis of Anglo-Saxon capitalism. The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now.

And it is a bit boring to read the same Krugman blog post again and again. After all I and the rest of the readers of this blog too already did read it at the source.

Reagrding Münchau:
"While the balanced budget law is economically illiterate, it is also universally popular"

Universally popular all over the world. I already did mention the US. The popular support for austerity in the us and the UK is hardly "forced" by german pressure. The same is true in the rest of the world. Balanced budget laws and constitutional balanced budget amendments are always popular. I doubt there are many countries where public opinion is different.

That is a problem and we should deal with it. And not seek the fount of all evil somewhere over the border in "Frankfurt".

They are oppositional to the preceding comment because we are debating. Are you so used to echo-chambers that you can't see the difference between debating and trolling? And length of a comment has nothing to with its quality. Look: I have read Krugman, you have read Krugman, probably most here have read the latest Krugman. No need to cite him again and again.

"It's not nearly as boring as 'top economists and bankers' and other weasels pushing the same self-interested but ultimately suicidal policies again and again."

What kind of non sequitur is that?

"But just in case you're here to make a more positive contribution "

I would like to make a positive contribution. But I fear nobody would listen. I actually wanted to write a diary about the latest state elections here, but the current climate on this blog dissuaded me. Perhaps the next one.

I've been trying to understand the substance of your opinions on the subjects we are ostensibly debating, with no luck, I'm afraid. A number of others seem genuinely confused as to what your positions are. It would greatly improve the signal to noise ratio if you would care to lay them out.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

Seconded. I'm still trying to figure out IM's views and recommendations here, but so far I can't see anything.

Beyond the denunciation of bad taste WW II comparisons (and most of us agree), the only impression remaining (unfortunately) is him taking taking exception when someone blames the German leadership (politicos, bankers, etc...), for the current mess.

And no, I disagree that we are driving German contributors out: if French ETribbers were reacting that way each time Sarkozy, the UMP or the PS politics is criticized here, there wouldn't be any single French person left. Germany is no different.

And yes I would really welcome a diary about the latest state elections and generally speaking about German politics as it affects EU policies.

But in your perspective of th world somehow everybody n the world calling the shots is a german.

Follow the money.

Current policy sends the money, or at least the overwhelming part of it, to Frankfurt. It is not unreasonable, to low order at least, to assume that this is because Frankfurt is disproportionally calling the shots. It is, after all, uncommon for the people who are calling the shots to unilaterally decide to send money to somewhere that contains nobody who is calling the shots.

I don't know where you come from, but where I come from people who make interesting and accurate predictions tend to enjoy a great deal of leeway in their rhetoric. Certainly compared to ignorant pseudo-Keynesian third-wayers like Bofinger, who couldn't build a reality-based economic model if his career depended on it (which, of course, it never will).

And no, just because you predicted something in your imagination, you don`t get special rights. The normal rules of discourse obligate verybody. At least were I come from. (Lower Saxony. Got a problem with that?)

Bofinger's curriculum vitae speaks for itself. My predictions and analysis here and elsewhere do likewise. And so would yours, if you had actually made any that I could not have gotten from Frankfurter Allgemeine Zeitung (a process that would have involved considerably less sniping at my personal habitus).

"Portugal, Spain, Italy, France, with Belgium either just before or just after Italy, depending on how much being white and speaking decent English counts for. And lo and behold, it happened exactly as predicted. "

But of course that is not what happened.

And if all of this is a currency thing, what about Ireland? They have a current account surplus, after all.

A tall claim. Do you really think a CA deficit of 1.0% gdp is unsustainable?

Which part of "in the absence of nominal growth" did you find it difficult to parse?

Of course having a 1 % deficit is unsustainable if you have 0 % growth.

Germany e. g. did run a small CA deficit for most of the second half of the 20th century. That did include years without growth. Wasn't really unsustainable.

It most certainly did not. Nominal growth was never below 4-5 per cent per year between 1950 and 1980 - and usually it was somewhat above that level.

And in any event there is a major difference between a year of flatlining nominal growth and a decade of same. Which is what we're looking at if governments don't start spending money to prop up employment.

Perhaps more to the point Italy has now run a small CA deficit and very low growth for twenty years. After twenty years can you really still say unsustainable?

Yes.

Past performance is not a guarantee of future performance. We have been extracting and burning oil on an industrial scale for nearly fifteen decades. Nobody of sound mind would presumably argue that this is sustainable.

In the absence of negative feedback loops on CA surpluses, current accounts imbalances continue right up until they don't. And then you have a crash.

"Nominal growth was never below 4-5 per cent per year between 1950 and 1980 - and usually it was somewhat above that level."

I was more thinking of the years past 1980.

"And in any event there is a major difference between a year of flatlining nominal growth and a decade of same."

Now you are shifting the goalposts a bit.

Is there even zero nominal growth in any european country?

So if assume zero nominal growth for a decade, then even a small current account deficit year after year is not sustainable. But that rest on two assumptions. How is this relevant regarding France or Belgium or even Italy?

No. If conditions change, what is unsustainable can become sustainable, and vice versa. But given no growth, any CA deficit is unsustainable.

Is there even zero nominal growth in any european country?

On average over the past half decade? Yes.

But of course the peak-to-trough part of the business cycle is an outlier...

So if assume zero nominal growth for a decade, then even a small current account deficit year after year is not sustainable. But that rest on two assumptions. How is this relevant regarding France or Belgium or even Italy?

It's relevant because you have an implicit assumption of zero interest rates stuffed in there. The actual sustainability condition is that total hard currency liabilities normalised to GDP must not diverge when time goes to infinity. It is not difficult to derive the sustainable CA deficit given exogenous nominal growth rates and nominal interest rates, but I have a train to catch now so I'll leave the algebra to the reader.

Far as I can understand Germany's Current Acccount was mostly balanced in the 70ies, deficit in early 80ies, surplus in late 80ies, deficit in 90ies and surplus in 00ies. Not that I am sure what either of you is trying to prove, but I figured you should at least have the right numbers.

Is not the immediate issue here that a CA deficit, under EMU rules (and with an ECB ready to destroy the economy or if they are not allowed to do that attack the banking system), creates a target for attack by the financial heavyweights?

That is the immediate question. I say that isn't the case and Jake tries to disprove this by talking about what happens with a CA deficit and no nominal growth in infinite time period.

A straw man, since I am talking about right now. And of course a small CA deficit is sustainable about a long time period. The data you researched regarding Germany show that Germany had a CA deficit from 1990 until 2002 without any trouble.

So my thesis is that a moderate CA deficit like France or Slovakia or Italy is no reason for worry.

That is the immediate question. I say that isn't the case and Jake tries to disprove this by talking about what happens with a CA deficit and no nominal growth in infinite time period.

It would really make this discussion a lot easier if you would make the effort to recall the chain of reasoning back more than three posts when you play these annoying "gotcha" games.

A straw man, since I am talking about right now.

Which just proves you don't know the first thing about how to look at macroeconomic data. To obtain an estimate of the structural surplus/deficit, you have to average over at least a couple of business cycles.

You are arguing like a climate change denier who says "but we had a really cold winter in 1992, so global warming isn't happening!"

And of course a small CA deficit is sustainable about a long time period. The data you researched regarding Germany show that Germany had a CA deficit from 1990 until 2002 without any trouble.

From 1991 to 2001, actually. And that's not a long time period. It's the trough-to-peak of the 1990s business cycle.

It would also be more informative to look at the CA position of the former West Germany only, since there was a considerable exodus of industry from the former Eastern Bundesländer under the Kohl Ostmark peg that strongly resembles the exodus from the European periphery under the Schröder Drachma peg.

So my thesis is that a moderate CA deficit like France or Slovakia or Italy is no reason for worry.

And since France and Italy are already under attack, your hypothesis was falsified even before you proposed it.

Under attack? Define that. You use such a loose word that you can prove anything with that.

And you are destroying your own argument. I won't even mention that as usual you don't know the slightest thing about german economic history. If we look at structural deficits and surpluses, the german CA surplus you obsess about vanishes. More importantly, there isn't much of a CA deficit in France or Italy. Or Ireland.
And before you start again babbling - climate science? Case of physics envy? - if we are only talking about six or seven countries, two or three countries are more then an isolated data point.

"You are under attack when your risk-free secondary market spread against the lowest rate in the currency zone is statistically distinguishable from zero."

In other words, everybody is attacked.

"In a unified currency zone, all subunits should be operating under the same risk-free rate."
Why? What about default risk?

"In which fictional alternative universe?

Try averaging over the last three business cycles and get back to me."

You really seem to think germanys economic history started in 2002. It hasn't. And prior to that the CA tended to be balanced.

"I never claimed that Ireland was a currency crisis, and you should fucking well know that by now if you are arguing in anything that remotely resembles good faith."
You can't handle dissent well. You claimed a perfect prediction record for your hypothesis, I pointed out that Ireland doesn't fit your hypothesis and you then grudgingly admitted that. Where exactly is the bad faith? You just omitted Ireland in your first comments.

"You are under attack when your risk-free secondary market spread against the lowest rate in the currency zone is statistically distinguishable from zero."

In other words, everybody is attacked.

No. Finland is not under attack.

"In a unified currency zone, all subunits should be operating under the same risk-free rate."
Why? What about default risk?

Only relevant to the private part of the foreign debt, which is why I was talking about the "risk-free" rate.

"In which fictional alternative universe?

Try averaging over the last three business cycles and get back to me."

You really seem to think germanys economic history started in 2002.

"The last three business cycles" is 1985 to 2008 (approx.).

You do know what "business cycle" means, right?

"I never claimed that Ireland was a currency crisis, and you should fucking well know that by now if you are arguing in anything that remotely resembles good faith."
You can't handle dissent well. You claimed a perfect prediction record for your hypothesis, I pointed out that Ireland doesn't fit your hypothesis and you then grudgingly admitted that.

There was nothing grudging about that. I pointed out from the first day that Ireland and Greece were totally and fundamentally different. This is not a problem for my hypothesis, any more than the existence of suicide is a problem the prosecutor in a case against a suspected serial killer.

"In a unified currency zone, all subunits should be operating under the same risk-free rate."

Why? What about default risk?

1. What about the Eurozone's "no-default rule"?

You can't have your cake an eat it, too. The combination of the following is an example of having your cake and eating it, too:

The GSP

Growth and Jobs

No default

No bailout

No fiscal transfer

Beggar-thy neighbour neomercantilism

Subordinating fiscal policy to the financial markets

Something has to give. The first thing to give was the GSP (violated by the Francogerman axis which then went on to convince the Council to change the rules) followed by "growth and jobs", then "no bailout" and "no fiscal transfers". Soon the "no default" rule will be breached, too. And then we may not have a Euro any more.

All of this could have been solved very simply and cheaply in February 2010 but it wasn't.

At the time the prediction was made, Ireland and Greece had already happened. I don't know what epistemology you subscribe to, but in the one I subscribe to you don't get points for predicting events that are already known to have occurred.

Ireland - the sovereign, not the banks - came under attack in early Winter 2009, almost immediately after NAMA was announced (for obvious reasons, since NAMA was always suicidally insane).

That it took until mid-2010 before their foreign creditors were bailed out is neither here nor there, since the only reason you brought up Ireland (aside from your obsession with the quaint notion that since Ireland was a debt crisis, Spain, Portugal, Greece, Italy, France and Belgium must also be debt crises) was to make a cheap shot at my 2009 prediction of the order in which Southern Europe was attacked.

(Note, incidentally, that by your definition, the current Spanish crisis is an entirely domestic affair.)

"aside from your obsession with the quaint notion that since Ireland was a debt crisis, Spain, Portugal, Greece, Italy, France and Belgium must also be debt crises"

I would be obliged if you don't make up my positions for me.

"Ireland - the sovereign, not the banks - came under attack in early Winter 2009, almost immediately after NAMA was announced (for obvious reasons, since NAMA was always suicidally insane)."

Bail-out was only in autumn 2010.

I still think the problem was not NAMA but the guarantee in 2008. Taken without the involvement of any outsiders.

You take countries with large CA deficits: Spain, Portugal, Greece and then mix them together with other countries: France, Italy, Belgium there the CA deficit is quite small. And you just hand wave Ireland away.

And I would be much obliged if you would refrain from tossing around red herrings. Such as the chronology of bailouts in a discussion of the chronology of attacks.

You take countries with large CA deficits: Spain, Portugal, Greece and then mix them together with other countries: France, Italy, Belgium there the CA deficit is quite small. And you just hand wave Ireland away.

If this were a debt crisis, Germany and France would have been attacked more or less at the same time - the two have roughly equal levels of debt to GDP, and if anything France has outperformed Germany in the growth department over the past two decades.

They weren't, so it isn't.

This is called deriving a testable hypothesis from your theory. When your testable hypothesis does not hold up to empirical scrutiny, the hypothesis is deemed to have been falsified. A large enough number of falsified hypotheses derived from a given theory casts doubt on the validity of the theory.

My claim is that the -Mark is experiencing a currency crisis due to the BuBa being unwilling to pay to defend its currency policy. Your claim is that the -Mark is experiencing no such crisis.

To disprove my claim, you have to demonstrate that debt is the dominant causative factor in every case (formally speaking - informally, you only have to demonstrate that it is so in the overwhelming majority of cases). To disprove your claim, I only have to demonstrate that current accounts are the dominant factor in a single case (again, if we stand on formalism - for practical purposes, I have to demonstrate that the test case is of at least moderate significance).

The former is a significantly more daunting proposition than the latter.

Or, to put it in slightly less formal terms, I am claiming that a suspect murdered his wife. You are claiming that the suspect did not murder anybody, and as proof of this you note that he did not murder his neighbour, who is known to have committed suicide.

Well, no. I don't . You have put a hypothesis and now you are not able to defend it. I have pointed out that CA deficits don't matter in some cases and all you have as an answer is to decree abritary rules.

You are not even looking at my hypothesis, which is that this is a currency crisis, not a debt crisis. You are playing silly gotcha games based on nothing but your total ignorance of elementary econometrics.

I did dare to assume that since you were arguing a point on economics, you possessed at least rudimentary schooling in, y'know, actual economics. But this is not in evidence anywhere in your argument - you argue more like a lawyer or a theologian than a scientist (or even an economist).

Furthermore, if what you say is right, countries should have been attacked in order of their CA deficits.

Um, no. That does not follow. At all. CA deficits are far from the only determinant in vulnerability to Soros attacks, whereas debt levels relative to asset levels are (almost definitionally) the overwhelmingly dominant component in vulnerability to bankruptcy.

Currency crises are caused by structural CA imbalances (note: Imbalances include CA surpluses - the surplus country is as responsible for the imbalance as the deficit country).

They are triggered by all sorts of things, and there is a substantial component of black magic in divining when a vulnerability to a currency run will translate into an actual run (though in this case it was real easy: Just sort the structural CA deficit countries in ascending order of political power).

Really, the distinction between fundamental and proximate cause is not a novel concept or arbitrary imposition. It has been a recognised concept in every school of epistemology (except perhaps the radical social constructivists) since Aristotle. And I did dare to presume - wrongly, apparently - that you had paid attention to epistemology at some point in the last three or four thousand years.

I said Ireland was bailed out in 2010, he said NAMA late 2009, I said that I meant states, not banks. And then said he meant "attacks" and that the Eurozone bailouts are red herring. And then I pointed out that attacks and bail outs go together like a horse and carriage.

And then you brought up the rescued banks by Belgium/Netherlands/France.

I noted that I had correctly predicted the sequence of attacks. Specifically, I wrote:

We even called the order in which they would come for Eurozone countries after Greece: Portugal, Spain, Italy, France, with Belgium either just before or just after Italy, depending on how much being white and speaking decent English counts for.

You then tried to play gotcha by noting that Ireland's creditors were not bailed out until 2010, and therefore Ireland should have been included in any prediction made in 2009.

Which is completely irrelevant, since the bailouts of Ireland's creditors were Act 3 of the Irish Assisted Suicide, and Act 2 - which was the first one that involved international economic hit men - took place in 2009 (Act 1 was in 2008-9, but as you correctly note that part involved only Irish economic hit men, not foreign ones).

You didn't mention Ireland at all probably because it didn't fit your model. As far as being white an d decent english speaking it isn't fitting your secondary model either. That you take refuge in a weasel word like attacks is telling.

For the last goddamn time: I didn't mention Ireland because Ireland was already under attack when I made my prediction about which countries would come under attack and in which order the attacks would happen.

I may be a sad existence, but I'm not sad enough to brag about being able to predict events that are already part of the public record. That you seem to think that this is a failure is less telling of any failure of mine than it is of your insistence on extrapolating wildly from a single data point to reach a conclusion that goes against the overwhelming weight of the remaining data.

You take countries with large CA deficits: Spain, Portugal, Greece and then mix them together with other countries: France, Italy, Belgium there the CA deficit is quite small. And you just hand wave Ireland away.

Belgium hasn't been attacked yet. Part of it is because, not having a government, it hasn't been able to implement damaging austerity plans. Though that might change soon or not... The Belgian issue is complicated by the "fact" that Flanders "belongs" in the Neuro and Wallonia in the Seuro.

But the Greek CA deficit was not 10 % of GDP when Greece was attacked. It is 10 % of GDP after the ECB-led Troika has destroyed the Greek domestic economy (and thereby cratered GDP) and imposed usurious interest rates on its foreign debts.

You are using a snapshot of different points in the business cycle to say something about the relative magnitude of structural variables. That's nonsense. If you want to make structural arguments (which you implicitly are here) then you need to look at cycle-averaged variables.

"But the Greek CA deficit was not 10 % of GDP when Greece was attacked. It is 10 % of GDP after the ECB-led Troika has destroyed the Greek domestic economy (and thereby cratered GDP) and imposed usurious interest rates on its foreign debts."

(This whole usurious debt is nonsensical. Greece still pays whatever interest rate it did got quite prior to the crisis on most of its debt. Even you can't assume that the new interest rates have already influenced its CA.)

Wait a moment. You are saying all the time that everything depends on CA deficits. But whatever, lets say it was only 8.0% in 2007. So what?

"You are using a snapshot of different points in the business cycle to say something about the relative magnitude of structural variables. That's nonsense."

Of course it is nonsense! Tell that to Migeru and his famous table! Tell that to your reflection in the mirror!

But lets talk about structural CA deficits. All I claimed is that structural CA deficits in Italy and France - not to talk about Ireland and Belgium - are low. A lot lower than in Spain and Greece and Portugal. Isn't that a bit of a problem to your CA hypothesis?

But lets talk about structural CA deficits. All I claimed is that structural CA deficits in Italy and France - not to talk about Ireland and Belgium - are low. A lot lower than in Spain and Greece and Portugal. Isn't that a bit of a problem to your CA hypothesis?

No, the prediction is that the endgame in all this is that all the deficit countries including France will end up on the other side of the fracture from Germany when the Euro blows up. (Cue in the discussion of Jerome's Niemöller moment)

The only reason why France migth be included in "core Europe" is the political prejudice of the Francogerman axis, but if France insists on hoisting itself to a new faux gold standard alongside Germany and the Netherlands, their economy will first suffer a private debt bubble and then get blown out of the water in the next business cycle.

The stability condition for a structural CA deficit country in a fixed-rate regime without a BanCor is that nominal growth must exceed nominal interest rates on the foreign debt. If the ECBuBa were pursuing a zero risk-free interest rate policy, this would be possible. But it isn't, so it isn't.

If you don't believe me, just derive the convergence criterion yourself.

(This whole usurious debt is nonsensical. Greece still pays whatever interest rate it did got quite prior to the crisis on most of its debt.

That is an extraordinary claim - you are arguing that the bulk of Greek foreign debt had a maturity greater than two years in 2009. I find that very difficult to believe, but perhaps you are better informed?

Wait a moment. You are saying all the time that everything depends on CA deficits. But whatever, lets say it was only 8.0% in 2007. So what?

Structural CA deficits. And more like 5 %, since in 2007 the ECBuBa hadn't destroyed a quarter of the Greek GDP yet.

Of course it is nonsense! Tell that to Migeru and his famous table!

I did. You missed the part where I noted that Ireland did not belong in the table?

Oh right, you didn't. You used it to play silly gotcha games with Mig.

But lets talk about structural CA deficits. All I claimed is that structural CA deficits in Italy and France - not to talk about Ireland and Belgium - are low. A lot lower than in Spain and Greece and Portugal. Isn't that a bit of a problem to your CA hypothesis?

No. Italy has had a cycle-averaged nominal GDP growth in the ballpark of 3 % of GDP, and a structural CA deficit in the ballpark of 1½ % of GDP, and the ECBuBa is targeting a "long-run" overnight rate in the ballpark of 1-2 %. This is at risk of blowing up if the average markup over the risk-free rate exceeds 1½ percentage points for any length of time.

If the banks that are lending to Italy are gearing 10:1 and require 7½ % nominal return on their equity, then all other overheads can amount to no more than 75 basis points before the whole edifice becomes unstable.

When last we looked at these numbers, they differed considerably from Eurostat numbers.

I asked Yanis Varoufakis point blank if he had any internal insight into official Eurostat/OECD numbers and the Greek economy. He replied that the numbers were absolutely not to be trusted. Greece neither reported them accurately, nor did Eurostat seem to care.

Ireland fits in the small country with large internationally active banking sector category alongside Iceland and Switzerland (which, in case you haven't noticed, is in a panic over the spillover from the Euro crisis into the macroeconomic and financial stability of its tiny economy). That's why Ireland's banks blew up in 2008, just like the Icelandic ones and the Belgian (Dexia and Fortis) did.

Oh, and don't forget Cyprus. They're a hedge fund too, and are duly under market attack.

Do you really have your head up one of your bodily orifices, or are you trolling?

I didn't mention Cyprus because there seems to be an genuine non-economic reason: the power plant explosion.

Yeah, the "external shock" cop-out of neoclassical economics.

About Cyprus: they have become an offshore appendage of the City of London where the banking sector has grown to 7xGDP. Were that not the case, an accident at a power plant would not have spelt economic disaster.

That remains to be seen, but the Swiss central bank is actually behaving intelligently in this crisis.

They still have their own currency after all and didn't join the cursed euro!

And that is why the Swiss CB still has the power to behave intelligently.

They may not be doing enough, and it may not be possible to do enough. But I wouldn't bet money on that in the way that I would without hesitation bet money on the non-viability of the Spanish balanced budget rule.

By noting that "CA imbalances (not deficits) are everything" is not my model. My model is that an unsustainably overvalued currency is the fundamental cause of the attacks on all the countries that were attacked after Ireland.

The structural CA imbalances are evidence that they have an overvalued currency, not the cause of the overvaluation.

Well, then what were you doing? You did oppose the use of term denoting fascism for the current crisis and its actors here and on the other thread. It#s not useful to compare everything to fascism and I do think it unseemly. Don't you agree?

"When the American Neocons or the Bush Administration described in detail what they intended to do, people dismissed it as extreme rhetoric, only to be shocked, shocked when they went on to do exactly what they said they would do. You are now making the same mistake with the German establishment (Merkel, Schäuble, Issing, Wulff, Weber, Stark, and the list goes on and on...)

And you tell me drawing parallels with the 1930s is out of place."

And then you, instead of challenging this minimizing of fascism and conspirational thinking, just did give in:

" But whatever. The circumstances are such that it doesn't matter what we shout as long as we're shouting."

Looked like resignation to me. You did argue for some sense and against the godwinning of discourse, but then you just seemed to give up. That anything goes as long as you show the right spirit is an all to commmon attitude on left wing blogs and so I did mistake your irony for that attitude.

Sure, They take orders from Germany. I have to disappoint you, but the SI is not working that way. The SPD likes to claim they had a lot of influence on the SPOE in the first post Franco years. (helping build democracy in spain etc.) Perhaps that is true.

But certainly not nowadays.

Do you want to claim the last debt ceiling crisis on the US was caused by german influences too? Or austerity in the UK, is Cameron just a german puppet?

The American debt ceiling isn't a debt brake though. It incorporates absolutely no relationship between debt and GDP. It's just an arbitrary nonsensical number. Whereas a eurozone debt brake calibrates the proper amount of debt to GDP. Or else budget deficit.

There's a big difference in that the American one cannot but be broken repeatedly whereas in principle, one might never break through the eurozone barrier.

In order to achieve these objectives as quickly as possible, Merkel is seeking support for an immediate program "that will be implemented on the national level within 12 months" (see graphic). This would entail the member countries adapting "the retirement age to demographic trends" and introducing financial policy rules that are modeled after Germany's so-called debt brake (an amendment to Germany's constitution that requires the government to virtually eliminate the structural deficit by 2016). Furthermore, within one year the countries would have to mutually recognize each other's educational and professional qualifications, as well as introducing a standardized means of assessing corporate tax to avoid so-called tax dumping (i.e. when countries try to attract companies by having an artificially low tax rate).

My bold.

It does not absolve other euro country leaders from liking cuts anyway - or being idiots - but as far as I can see, introducing debt brakes in the eurozone originated with the German government.

"We're not searching for ways to blame Germany for stuff, that's an interested reading on your part."

An obvious reading. We are commenting on a post titled Gleichschaltung, after all. And that purports to comment on spanish politics. But I learned nothing about spnaish politics -I would have liked too, isn't that the purpose of a place like ET? - but only about your german obsession.

Excuse me for not titling my post The forcible legal realignment of Spain.

It purports to put a Spanish political event in its European context

"I leaned nothing" is a statement about yourself

After all, there's this

The impression that something is afoul here is based in part on the fact that as late as August 18, the conventional wisdom in Spain was that it was difficult to carry out the Constitutional reform that Sarkozy and Merkel demanded by mid-2012, and that the government's position was officially that the existing Law on Budget Stability (introduced by Aznar's PP government in 2001) was sufficient. ...

...

Only two days after this was published, ZP announced his intention to introduce a constitutional spending ceiling during an extraordinary plenary session of the Parliament convened to discuss the recent financial turbulence. The reform will be carried out with two further extraordinary sessions this coming Tuesday and Friday, as the Parliament would normally be adjourned at this time.

And, sorry, it is not me. I'm quoting and translating news reports from ElPais in which Germany's 2009 debt brake is mentioned as a blueprint and motivation, and Merkel's (with Sarkozy tagging along haplessly) demand for forcible legal realignment of the whole Eurozone by next Summer.

I even volunteered a couple of reasons why the reform is being carried out in a rush and in alleged (by opponents) violation of parliamentary procedure. And the move cannot be universally popular when the PSOE parlamentarians vote for it like they're going to a funeral while PP parlamentarians cheer.

Zapatero is being strongarmed into doing all of this. We don't know how exactly or who's delivering the orders, but there are strong hints.

"Excuse me for not titling my post The forcible legal realignment of Spain."

What force? We are not talking about law on a euroepan level. What other force?

"It purports to put a Spanish political event in its European context"

Of course. But in your case it is always germany made us do it. Not a very illuminating context. The old excuse of politicians everywhere was Brussels made us do it; no it's Berlin made us do it. Still an excuse.

"I leaned nothing" is a statement about yourself

You really are a bit of an asshole sometimes. And that is a statement about you. Or at least your blog persona.

"Zapatero is being strongarmed into doing all of this. We don't know how exactly or who's delivering the orders, but there are strong hints."

That is the interesting part and I wish you would have written more about that.

What force? We are not talking about law on a euroepan level. What other force?

Interesting question. Since ECB has threathened to sink the Greek banking systems if the government did not accept killing of their own economy, we know that there are other forces then law at play. Which exactly, are often hard to figure out in time.

Lorenzo Bini-Smaghi, the most prolific campaigner against default, told il Sole24 ore that the ECB had carried out an analysis on the potential impact of a Greek debt restructuring, and found it would imply the failure of a large part of the Greek banking system, as the Greek banks hold a large portion of the Greek sovereign debt. (Another reason is that Greeks would transfer all their deposit to foreign banks, a process that is already partially under way). At the point the Greek banks would no longer have access to ECB liquidity, and would have to end their support for the corporate sector. He said that since Greece does not have a primary balance, a default at this time would lead to the cessation of pension and other social payments. The Greek economy would collapse, with devastating economic and social consequences. He said the other countries should stop pushing Greece into a catastrophe. In what we would understand to be an indirect reference to Wolfgang Schäuble, he said that talk about restructuring had seriously negative effects on market sentiment.

Original Eurointelligence source appears to have been broken, and the Googlecache of it too. But it was quoted on ET on April 15th so probably written shortly before that.

Since ECB has threathened to sink the Greek banking systems if the government did not accept killing of their own economy, we know that there are other forces th[a]n law at play.

And apparently they strongarmed Ireland into accepting a "rescue" within days of the Irish finance minister claimin that the Irish government was funded on a cash-basis for over half a year.

The ECB has also famously sent a letter to Italy's government with a shopping list of legislative reforms that must be enacted or the Italian banking system will be killed. There are contradictory stories about similar demands on Spain.

Trichet, when accepting the Charlemagne Prize for "contributions to European Unity", suggested an EU finance minister without a budget but the power to interfere with member state budgets. This has now been picked up by the Dutch Prime Minister.

That's pretty stringent: recourse to debt is not allowed, except in adverse phases of the economic cycle within the bounds of the effects determined by the cycle, or due to a state of necessity that cannot be sustained with ordinary balance decisions.

There is no universally accepted definition of a currency crisis, but most would agree that they all involve one key element: investors fleeing a currency en masse out of fear that it might be devalued, in turn fueling the very devaluation they anticipated. Although such crises--the Latin American debt crisis of the 1980s, the speculations on European currencies in the early 1990s, and the ensuing Mexican, South American, and Asian crises--have played a central role in world affairs and continue to occur at an alarming rate, many questions about their causes and effects remain to be answered.

I think the scenario goes like this:

ECB denies euros to banks of CA deficit country, as they have threathened to, effectively trying to kill the banking sector of that country.

CA deficit country must change currency in order to have the banking system working.

That currency falls sharply against the euro, worsening the CA deficit. This is the crash part.

CA deficit country must balance their CA quickly. This will probably include rationing and other drastic actions.

Mechanically speaking, a currency crash is a run on a country's hard currency reserves. Since the -Mark is hard currency for -zone members (thanks to the ECBuBa's idiocy), a systemic bank run would be a currency crisis in every way that matters.

Of course, once you have to ration hard currency anyway, you might as well take the opportunity to repudiate your hard currency debts completely and exit from the -zone. But that's a consequence rather than a cause of the run on the country's hard currency reserves.

Am I wrong to assume that the exit would (likely) trigger a continued run for some time - say at least a couple of months? Markets appear a lot like herd animals to me, hard to stop once they get stampeeding in one direction or another.

An exit from the -Mark would involve some pretty epic defaults. If the Russian and Argentinian experiences are anything to go by, it takes 12-18 months for the hysterical children to calm down after something like that.

Mechanically speaking, a currency crash is a run on a country's hard currency reserves. Since the -Mark is hard currency for -zone members (thanks to the ECBuBa's idiocy), a systemic bank run would be a currency crisis in every way that matters.

May I point out that the run is already underway and has been for many months?

Greeks worried about a debt restructuring or a euro exit increasingly transfer their money to banks abroad, Bild-Zeitung reports. According to the mass circulation tabloid German banks such a savings bank in Munich have posted signs in their windows advertising in Greek and German that Greek costumers will be advised in Greek. According to the paper 30bn have already been transferred from Greece abroad since the crisis started.

Of course this puts a strain on the Greek banks which only increases their dependence on the ECB. For Greeks, another of the refuges, apart from Germany, was Cyprus which has always acted as an offshore banking center for Greece. Now Cyprus is in its own crisis.

But it's not just Greece and it's not just since last year. Remember these charts by Martin Wolf?

The top left chart indicates that the ECB has accumulated large claims on other central banks - this is the result of money flowing from the periphery to the core. Nothing surprising there, as the trade imbalances are structural and have persisted over the entire life of the Euro. However, the top-right chart indicates that the claims among central banks have developed only since the financial crisis started in 2007/8. So it's not result of trade imbalances as one might have guessed, but of flight to safety.

And now, as we know, not even Euro assets in Germany are "safe" enough and people are piling on the Swiss Franc or (after the Swiss National Bank had enough of the Eurozone exporting deflation to it) to the Norwegian Krone.

So, yes, the run on the Eurozone banking system is well underway. It was bad enough in April already for

Bundesbank open to capital controls as a last line of defence

Bundesbank board member Andreas Dombret told Börsenzeitung that capital controls can be introduced by countries as "a last line of defence". "If they are used, it should be done temporarily and in a transparent and targeted manner", Dombret said. In combating high inflows of capital countries need to define a hierarchy of things to do. "If after that the inflows persists, capital controls can be considered", Dombret said. Capital controls were up until very recently a taboo and have only been proposed last week by the IMF in a position that was controversial among certain member states.

But he's talking about inflows of capital. Is he talking about Switzerland, rather than, say, Greece?

Indeed it is and indeed they did. And quite frankly it seems like an excellent solution to a comfortable problem. Funnily, some politician recently argued that Sweden should enter a currency union - with Switzerland.

Switzerland can't unilaterally defend a peg, it can only unilaterally defend a ceiling. If you want a peg to the CHF, the ECBuBa needs to be willing to print money on demand, in whatever quantity required, to fix the lower bound of the /CHF exchange rate.

That's the only way you can ever defend a peg.

And the BuBa gave a quite instructive exposition on its attitude towards doing its part to defend European currency pegs back in 1993.

By printing money.

You say that like it's a bad thing.

You do understand that this is precisely what the SNB would have been doing if they were defending a peg rather than a ceiling, right?

The point of declaring a ceiling rather than a peg is that the SNB has not committed itself to defending the floor when the hot money leaves. Which means that it is free to expend its hard currency reserves in discretionary defense of strategically important imports, rather than handing it over to the first Soros wannabe who manages to short a hundred billion CHF.

Crises in the ERM. In 1992, investors lose confidence in the stability of the pound sterling, in particular, and then, in 1993, in the French franc, resulting in speculative selling of the pound and franc; in 1992, the United Kingdom and Italy leave the ERM; in 1993, the fluctuations margins around the bilateral central rates are expanded sharply. The Bundesbank with its commitment to price stability had refused to lower interest rates massively. The partner countries are forcibly reminded of their responsibility for their currencies; the process of convergence needed for monetary union is strengthened.

I pointed out that a currency of its own is not always a good thing for a small country.

I assume that you have some sort of reason to believe this? Is that a reason you would care to share with the rest of us? Because it is certainly not obvious to me that any small country anywhere has ever done better by pegging its currency to a larger currency than it could have reasonably expected to do if it had retained full sovereignty over its risk-free yield curve.